As per CLSA, market leader Bharti Airtel had a 31 per cent revenue share at the end of September, No. 2 Vodafone was at 23 per cent and Idea at 19 per cent.Kalyan Parbat | ET Bureau | December 24, 2015, 07:51 IST

KOLKATA: A three-way combination involving telecom operators Reliance Communications, Sistema Shyam Teleservices and Aircel would have an 3G footprint that’s bigger than those of Vodafone and Idea Cellular and a likely 4G presence in eight circles, although a heavy debt burden could cripple the deal, analysts said.

Anil Ambani-controlled RCom and Aircel announced exclusive 90-day merger talks on Tuesday to combine their wireless businesses under a newly listed Rs 35,000 crore entity, barely a month after RCom, India’s fourth-largest carrier, and the Indian unit of Russia’s Sistema JSFC announced an all-stock merger.

"A combined entity could offer 3G services in 18 circles, launch 4G services on the 2300 MHz band in eight circles and hold 2G spectrum in 22 circles," Goldman Sachs said in a note to clients Wednesday. Vodafone offers services in 16 circles and No. 3 carrier Idea Cellular is present in 13.

The US brokerage noted that the potential combine would "breach overall spectrum caps in Tamil Nadu, West Bengal and Jammu & Kashmir. Operators are not allowed to hold more than 25% of the total spectrum in a circle. People familiar with the matter said the new entity may surrender excess airwaves.

Brokerage IDFC said the combined wireless operations of "RCom, Sistema Shyam and Aircel would have a formidable 12 per cent revenue market share, but the debt burden of both RCom (Rs 39,900 crore) and Aircel (Rs 20k-to-24k crore range) could be a possible deal breaker."

As per CLSA, market leader Bharti Airtel had a 31 per cent revenue share at the end of September, No. 2 Vodafone was at 23 per cent and Idea at 19 per cent. RCom had a 5 per cent share and Aircel 6 per cent, too far behind to pose a serious challenge to any of the top carriers.

An RCom-Aircel combine would be saddled with Rs 35,000 crore of debt, which analysts indicated may require Rs 3,500 crore of free cash to service, even though RCom has said the loans were taken at below 7 per cent interest. However, sources said RCom and Aircel would each transfer about Rs 10,000 crore of debt to the combined entity, with revenue pegged at aboutRs 25,000 crore and earnings before interest, tax, depreciation and amortisation at Rs 6,000-7,000 crore.

According to IDFC, consummation of a deal by RCom to sell its towers and optic fibre assets would eventually hold the key. Earlier this month, RCom signed a non-binding agreement to sell its telecom towers to Sanjiv Ahuja-led Tillman Global Holdings and private equity buyout group TPG in a move aimed at reducing debt. It is also looking at selling its 190,000 km optic fibre network to further cut debt and the Tillman Global-TPG combine is evaluating a possible purchase. Both deals combined could net RCom some Rs 30,000 crore.

Analysts at IDFC also said that "managing a three-way merger" along with RCom’s global and other wireless operations would be a complex affair, which could be further shackled by the "ongoing CBI probe on the Aircel-Maxis deal".

The CBI is investigating alleged irregularities in the sale of Aircel founder C Sivasankaran’s stake to Maxis Communications. The owners of Maxis have denied any wrongdoing.

In the run-up to an infrastructuresharing partnership with Reliance Jio Infocomm and the potential sale of tower assets, "RCom has emerged as a consolidator in the bottom-half of the market," said IDFC.

IDFC analysts said Aircel may look for a separate buyer for its 4G airwaves in the 2300 MHz band in eight circles, "which would be of little interest to RCom." Aircel has reportedly been in talks to sell its 4G airwaves to Airtel for about Rs 4,000 crore, although the companies haven’t confirmed any negotiations.

Analysts at ICICI Securities said an RCom-Aircel merger would increase the residual licence period of RCom’s 1800 MHz airwaves by six years. "RCom’s airwaves in the 1800 MHz across 14 circles is up for renewal in calendar 2021, while Aircel’s in the same markets is in calendar 2026, significantly pushing up the combined entity’s spectrum renewal burden till CY26," the brokerage said.

If the RCom-Aircel merger happens, it will help the Anil Ambaniled carrier address GSM coverage gaps in West Bengal, Bihar and Assam, where it did not win back 900 MHz airwaves in the March auction.

Separately, RCom initiated contempt proceedings in the apex court against the Department of Telecommunications, blaming it for delaying a spectrum sale that would have enabled dues to be paid to Ericsson and lenders.